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Use of Leverage, Short Sales, and Options by Mutual Funds

47 Pages Posted: 22 Mar 2017  

Paul Calluzzo

Queen's University - Smith School of Business

Fabio Moneta

Queen's University - Smith School of Business

Selim Topaloglu

Queen's University - Smith School of Business

Date Written: March 20, 2017

Abstract

We study the use of leverage, short sales, and options by equity mutual funds. Consistent with agency-induced motives for the use of these complex instruments, we find that they are often used by poorly monitored funds, and are associated with poor outcomes for investors such as lower performance, higher idiosyncratic risk, more negative skewness, greater kurtosis, and higher fees. Consistent with moral hazard, we also find that mutual funds that use these instruments hold riskier equity positions. Mutual funds attempt to use complex instruments to reduce the risk of their portfolios but in an imperfect and costly way.

Keywords: mutual funds, leverage, short sales, options, complex instruments, fees, performance, risk

JEL Classification: G11, G23

Suggested Citation

Calluzzo, Paul and Moneta, Fabio and Topaloglu, Selim, Use of Leverage, Short Sales, and Options by Mutual Funds (March 20, 2017). Available at SSRN: https://ssrn.com/abstract=2938146 or http://dx.doi.org/10.2139/ssrn.2938146

Paul Calluzzo

Queen's University - Smith School of Business ( email )

Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Fabio Moneta

Queen's University - Smith School of Business ( email )

Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Selim Topaloglu (Contact Author)

Queen's University - Smith School of Business ( email )

437 Goodes Hall
143 Union St.
Kingston, Ontario K7L 3N6
Canada
613-533-6573 (Phone)
613-533-2321 (Fax)

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